McDonald's Isn't Lovin' February's Comps

McDonald's continues to show weak comps in 2014. Can the year improve while McDonald's faces increased competition from Wendy's, Burger King, and Yum! Brands?

Mar 15, 2014 at 1:15PM

Snip

Source: McDonald's .

McDonald's (NYSE:MCD) reported February comparable-store sales on Monday with an overall decline of 0.3% for the month. February's results were worse than the prior month's report, which the company had forecast to be weak. The continued weakness indicates that McDonald's still hasn't moved past the menu issues that plagued the chain's performance in 2013. Similar menu issues could lead to a weaker year for Wendy's (NASDAQ:WEN) as well. 

The largest comps loss by segment in February was a 2.6% drop for APMEA -- Asia/Pacific, Middle East, and Africa. APMEA had reported comps growth of more than 5% in January and it was the strongest performer that month. McDonald's blamed the change on weakness in Japan and negative comps in Australia. Europe was the only segment up in February with 0.6% growth -- down from the 2% growth in January. Domestic comps were down 1.4%, which did improve on the prior month's more than 3% drop. 

Will McDonald's weak start continue through the year? 

Menu misses 
McDonald's admitted that its performance last year suffered from the introduction of too many menu items in a short period of time, which complicated inventory and kitchens, slowing wait times. Many of these new menu items also proved unpopular.  

Earlier this month, Bloomberg reported that McDonald's slashed the price of the unpopular Mighty Wings by 40%. The deal will remain in place until the chain's inventory runs out, which could take a while considering that the company ended last year with about 10 million pounds of frozen wings on hand -- or about 20% of the stock ordered when the wings launched in September. It's likely that the company is taking a loss to move the stock out of its freezers.

Menu issues related to new product launches weren't limited to the Mighty Wings -- or to McDonald's. Wendy's could face similar conditions this year if the company continues to embrace a whirlwind schedule of menu releases.

The Pretzel Bacon Cheeseburger that Wendy's launched last summer led to third-quarter comps growth of nearly 6% at company-owned stores -- the highest quarterly comps since 2005. However, the specialty burger -- and its sister chicken sandwich -- were ushered off the menu in favor of a brioche-bun update on a previously released limited-time-only mushroom burger. This was followed by two value-menu chipotle burgers and, more recently, the Premium Cod sandwich.     .

Wendy's predicts comps of 2.5% to 3.5% in 2014. That's an optimistic range considering that the chain started 2013 with comps that looked more similar to those of McDonald's. Those types of annual comps would require most of the limited-time items to perform like the Pretzel Bacon Cheeseburger. That seems unlikely. 

While Wendy's has followed McDonald's path of making questionable menu decisions, McDonald's has followed Wendy's in restructuring its value menu. Will the change help comps?

New value 
In November, McDonald's announced that it had changed its Dollar Menu to the more inclusive Dollar Menu & More, which features products at a variety of prices. Wendy's has a similar structure in place with its Right Price Right Size menu

However, the change might not help boost McDonald's comps going forward. Between 2004 and 2011, McDonald's annual comps growth averaged about 6%. It's not a coincidence that the company's comps started suffering as the economy improved. Competition has always been fierce between the fast-food restaurants, but now customers have more economic confidence and they increasingly make menu selections based on taste rather than value. 

So a more robust value menu might not prove the draw it was in prior years.

Will McDonald's recover in 2014?
The company's at least stepping in the right direction by simplifying the menu and getting the Mighty Wings off freezer shelves. McDonald's also shuttered the McResource employee-assistance website, which was proving to be a public relations disaster with its unrealistic monthly budget that showed a full-time worker couldn't live off the company's wages and advised against eating unhealthy fast food. 

Bk Big King

Source: Burger King.

The market became even more competitive over the latter part of last year as Wendy's found some limited-time item success. Burger King (NYSE:BKW) posted a surprisingly good fourth quarter with global comps growth of nearly 2% and domestic comps up 0.2%. The company attributed the growths in a widely weak quarter to the launches of the Big King and BBQ Rib sandwiches, which are essentially Burger King's versions of McDonald's Big Mac and McRib.

Also, Yum! Brands' Taco Bell is launching a breakfast menu. The idea could flunk out with customers, but even a slight erosion of McDonald's breakfast traffic would further harm its comps. 

Foolish final thoughts 
The addition of numerous menu items -- often limited-time offers -- carries inherent risks. Inventory inflates and the potential performance of each item can become cannibalized by concurrent launches. McDonald's would do well to keep paring back the new menu items. However, economic confidence could still keep McDonald's comps lower than they were during the recession.  

Fast food isn't grilling up steady growths 
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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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